The Battle To Watch: Volkswagen Vs. Toyota

General Motors
and Chrysler are sinking away,
Toyota
is losing money, but in Wolfsburg (the lair of the German car company),
Volkswagen
is planning to conquer the world (or at least be No. 1) by 2018.

Let's look at a few of the recent headlines:

In the first quarter this year VW worldwide sales closed the gap on No. 1 automaker Toyota. VW sales of 1.4 million fell 11%, while Toyota's 1.8 million dropped 27%--narrowing the first-quarter sales gap to 363,000 vehicles from 840,000.

VW said it would build its new series of small cars (near minicars) in Slovakia, the now-independent half of once-Czechoslovakia. Production starts in 2011, and VW expects at least 500,000 global sales a year.

VW says it expects to be profitable this year. First-quarter profit was $403 million, but that quarter stayed black because of the sale of its heavy truck business in Brazil to an ally. (I am sure VW figures are correct but will never forget what a then-VW CEO, an old friend, said to me many years ago: "There is accounting, there is German accounting, and there is Volkswagen accounting." Times and standards have changed, but sometimes old habits die hard.)

Plus there is the major expansion in the U.S. with a new plant in Tennessee. A new car is to be built there to challenge Toyota's and Honda's
dominance of the family sedan market. VW hopes to sell 1 million VWs and Audis here by 2018, which is enormously ambitious considering sales last year were 315,000.

VW has nine brands worldwide; the best known are VW, Audi (1 million worldwide sales), Skoda (the old Czech brand) and SEAT (from Spain)--and don't forget the luxury Bentley. VW is the No. 1 seller in Europe (though Ford's new Fiesta outsold VW's best-selling Golf model last month, but I don't know what that means yet); No. 1 in China; and No. 1 or 2 in Brazil (
Fiat
is usually leading). But it is weak in U.S.

And we mustn't forget the takeover by
Porsche
, which now owns 51% of VW and apparently aims for 75% ownership, which may have ramifications that we cannot now predict. There has been a historical relationship between Porsche and Volkswagen that is ending with the Mighty Mouse swallowing the cat.

A bit of history: The original Volkswagen, which we in the U.S. call the Bug or the Beetle and the Germans called the Type 1, was designed by Ferdinand Porsche in the 1930s at the request of Adolph Hitler. The Fuhrer wanted a small inexpensive car for the German masses, thus the name Volkswagen, or "people's car." The factory was built, but the war came before any were really sold. After the war the bombed-out plant was put under control of Heinz Nordoff, who had worked for GM's German company. It was Nordoff who turned VW around and created the modern company.

Porsche, meanwhile, had no part of this post-war VW and had started his own sports-car company. But there were soon two sides of the family: the Porsche side, descendants of the Ferdinand's son, and the Piech side, descendants of his daughter. They didn't get along, and for the sake of peace they were bounced from operations. Ferdinand Piech, grandson of the original Porsche and a domineering but brilliant engineer and executive, joined Audi/VW, eventually rising to VW's chief executive. He retired from active management but was chairman of the board, and he really never let go. It is Piech who pushed VW upscale, building up Audi and adding Bentley, Lamborghini and Bugatti nameplates.

Now Porsche, the company, controls Volkswagen--and Piech is still VW chairman. Do the two sides of the Porsche family agree on direction and control? There is no public dispute or quarrel, but then this doesn't mean anything. Who knows what old jealousies or disputes lie within the hearts of men? It's just that we know "a house divided against itself cannot stand."

But that potential cloud is for the future.

Today there are technological questions about the future of the automobile, and VW and Toyota disagree.

Toyota is a firm believer in hybrid technology, that is, two engines, including a set of batteries, to push the car electrically for a bit. This could lead into "plug-in" hybrids or even pure electrics someday.

VW believes that the best answers lie in the diesel engine and improvements in the gasoline engines. This may not sound as adventuresome, but as a practical matter VW has a point. VW will be getting 50 miles per gallon or more in its small cars in a few years, and its adoption of dual-clutch transmissions and turbo- or super-charging is being followed by many around the world. The VW Jetta TDI (turbo diesel) is a huge hit with car testers in this country.

What's clear is that the German Volkswagen and Japanese Toyota are in a battle for world leadership in this industry. Maybe someday the Chinese will be challenging. Maybe someday Ford will be there. But right now it's Toyota in the lead with an ambitious Volkswagen nipping at its heels.